Page 1 of 5
CMA JUNE, 2016 EXAMINATION OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS.
Time: Three hours Full Marks: 100
All questions are to be attempted.
Show computations, where necessary.
Answer must be brief, relevant, neat and clean.
Start answering each question from a fresh sheet.
PART – A: [Q. No. 1(a) – (f)] : (20 MARKS) Q. No. 1.
(a) Explain the difference between “Free Cash Flow” and “Cash Flow from Operating Activities”.
(b) Discuss the role of the appropriate tax policy in the economic development of Bangladesh.
(c) Define the “Impairment of Assets” as per IAS 36, and “Non-Current Assets held for sales” under IFRS 5.
(d) List down the criteria to differentiate operating lease from financial lease under IAS 17.
(e) Define “related party transactions” under IAS 24. Explain the importance of disclosure of related party transaction to minimize the conflict of interests.
(f) Define Double Taxation. Explain the three major methods of giving double taxation relief to entities with overseas earnings.
[Marks: (3+4+2+3+4+4) = 20]
PART – B: [Q. No. (2 –7)]: (30 MARKS) Q. No. 2.
“Bob The Builder” has a construction contract in progress. The contract commenced on 1 July 2015 and is scheduled to run for two years. The contract has a fixed price of Tk.9,000,000. Bob The Builder uses the value of work completed method to recognize attributable profit for the year. At 30 June 2016 the proportion of work certified as completed was 35%. Work in progress (cost incurred during year to 30 June 2016) Tk.4,000,000 Estimated cost to complete contract Tk.6,000,000 Cash received on account from contract client Tk.3,250,000.
Required:
(i) Calculate the amount of revenue and cost that “Bob The Builder” should include in its statement of comprehensive income for the year ended 30 June 2016 in respect of the construction contract.
(ii) Calculate the gross amount due from/to customers to be included in Bob The Builder’s statement of financial position as at 30 June 2016.
[Marks: 5]
Q. No. 3.
TIP paid TK2.50 per share to acquire 100% of TOP’s equity shares on 1 April 2015. At that date TOP’s statement of financial position showed the following balances with equity:
TK. ‘000 Equity shares of TK1 each 180
Share premium 60
Retained earnings 40
TOP’s net asset values were the same as their book values, except for land which was valued at TK70,000 more than its book value.
TIP directors estimate that any goodwill arising on the acquisition will have a useful life of 10 years.
Required:
(i) Calculate goodwill arising on the acquisition of TOP.
(ii) Explain how TIP should record the goodwill in its group financial statements for the year ended 31 March 2016, in accordance with IFRS 3 Business Combinations.
[Marks: 5]
Page 2 of 5 Q. No. 4.
DDD is an entity supplying goods and services to other businesses. DDD is registered for Value Added Tax (VAT) in Bangladesh.
DDD is partially exempt for VAT purposes.
During the last VAT period DDD purchased materials and services costing Tk. 400,000 excluding VAT. DDD used these goods and services to produce both standard and exempt supplies. VAT was payable at standard rate on all purchases.
DDD supplied goods and services to its customers, some of these were at standard rate VAT and some were exempt VAT.
Excluding VAT: Tk.
Standard rate goods and services 450,000
Exempt supplies 150,000
At the end of the period DDD prepared a VAT return. Assume DDD had no other VAT related transactions.
Required:
(i) Explain the difference between the treatment of items that are zero rated and items that are exempted from VAT.
(ii) Calculate the net VAT balance shown on DDD’s VAT return.
[Marks: 5]
Q. No. 5.
JMC commenced business in Country D on 1 July 2014 and, on that date, it acquired property, plant and equipment for Tk.440,000. JMC uses the straight line method of depreciation. The estimated useful life of the assets was five years with no residual value. JMC’s accounting year end is 30 June.
All the assets acquired qualified for a first year tax allowance and then an annual tax allowance.
On 1 July 2015, JMC revalued all of its property, plant and equipment. This revaluation resulted in an increase in asset values of Tk.Tk.100,000.
Required:
(i) Explain why JMC’s revaluation of its assets would cause a temporary difference as defined by IAS 12 Income Taxes.
(ii) Calculate the amount of the deferred tax provision that JMC should include in its statement of financial position as at 30 June 2016, in accordance with IAS 12 Income Taxes.
[Marks: 5]
Q. No. 6.
You are the partner in charge of the audit of TXT. The following matter has been brought to your attention in the audit working papers.
During the year TXT spent Tk.500,000 on applied research, trying to find an application for a new process it had developed. TXT’s management has capitalized this expenditure. TXT management is refusing to change its accounting treatment as it does not want to reduce the year’s profit. The draft financial statements show revenue of Tk.40 million and net profit of Tk.4.5 million.
Required:
(i) Explain what is meant by “materiality” AND whether the matter highlighted above is material.
(ii) Identify the type of audit report that would be appropriate to the above statements, assuming that TXT’s management continue to refuse to change the financial statements.
[Marks: 5]
Page 3 of 5 OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS.
Q. No. 7.
KPS has recently begun to lease an expensive machine. The lease agreement effectively means that KPS takes on substantially the risk and rewards associated with owning the asset.
The managing director has instructed KPS’s finance director to treat the lease as an operating lease in order to show a better financial position.
Required:
Explain any ethical issues that this may cause for the finance director.
[Marks: 5]
PART – C: [Q. No. (8 –9)]: (50 MARKS) Q. No. 8.
OTC’s trial balance at 31 May 2016 is shown below:
Notes Tk.000 Tk.000
5% Loan notes (issued 2013, redeemable 2024) (ix) 1,480
Administrative expenses 779
Cash received on sale of equipment (v) 23
Cash and cash equivalents 207
Cost of sales 4,080
Distribution costs 650
Equity dividend paid 1 October 2015 (vii) 335
Income tax (ii) 24
Inventory at 31 May 2016 (i) 1,055
Land and buildings at cost at 1 June 2015 5,180
Loan interest paid 37
Equity shares Tk.1 each, fully paid at 1 June 2015 5,650
RDX ordinary shares purchased (viii) 135
Plant and equipment at cost at 1 June 2015 (v) 4,520
Provision for deferred tax at 1 June 2015 (iii) 282
Provision for buildings depreciation at 1 June 2015 (iv) 262 Provision for plant and equipment depreciation at 1 June 2015 (vi) 2,260
Retained earnings at 1 June 2015 1,990
Sales revenue 6,780
Share premium 565
Trade payables 300
Trade receivables (x) 2,590
19,592 19,592 Notes:
(i) OTC has always valued its inventories using a manual system. On 1 June 2015 OTC purchased and installed a computerized inventory system and changed its inventory valuation method to the industry standard method.
The impact on inventory valuation due to the change in policy was calculated as:
Inventory value increase at 31 May 2015 by Tk.148,000.
Inventory value increase up to 31 May 2016 by Tk.210,000.
(ii) The income tax balance in the trial balance is a result of the under provision for the year ended 31 May 2015.
(iii) The tax due for the year ended 31 May 2016 is estimated at Tk.160,000 and the deferred tax provision should be decreased by Tk.30,000.
(iv) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land included in land and buildings is Tk.3,000,000. Buildings depreciation is treated as an administrative expense.
(v) During the year OTC disposed of old equipment for Tk.23,000. The original cost of the equipment sold was Tk. 57,000 and its book value at 31 May 2015 was Tk.6,000.
Page 4 of 5 Q. No. 8.(cont’d…….)
(vi) Plant and equipment is depreciated at 20% per annum using the reducing balance method.
Depreciation of plant and equipment is considered to be part of cost of sales. OTC’s policy is to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal.
(vii) During the year OTC paid a dividend of Tk.335,000 for the year ended 31 May 2015.
(viii) OTC purchased and cancelled 100,000 of its own equity shares on 31 May 2016 for Tk.135,000. These shares had originally been issued at a 10% premium.
(ix) Long term borrowings consist of loan notes issued on 1 June 2013 at 5% interest per annum.
(x) On 22 June 2016 OTC discovered that CIT, one of its customers, had gone into liquidation.
OTC has been informed that it will receive none of the outstanding balance of Tk.230,000 at 31 May 2016.
Required:
(a) Explain how the change in inventory accounting policy should be recorded in OTC’s financial statements for the year ended 31 May 2016, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
(b) Prepare OTC’s statement of profit or loss and statement of changes in equity for the year to 31 May 2016 AND the statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards.
Notes to the financial statements are not required, but all workings must be clearly shown.
Do NOT prepare a statement of accounting policies.
[Marks: 25]
Q. No. 9.
MNC‘s trial balance at 31 March 2016 is shown below:
Notes Tk.000 Tk.000
4% Loan notes (redeemable 2024) 500
Administrative expenses 190
Amortization of deferred development expenditure 30
Cash and cash equivalents 42
Deferred development expenditure (i) 150
Distribution costs 72
Equity dividend paid 1 September 2015 62
Income tax (ii) 8
Inventory at 31 March 2016 214
Cost of sales 1,605
Land and buildings at cost at 1 April 2015 2,410
Loan interest paid 10
Ordinary Shares TK1 each, fully paid at 1 April 2015 930
Plant and equipment at cost at 1 April 2015 560
Provision for deferred tax at 1 April 2015 (iii) 86
Provision for buildings depreciation at 1 April 2015 (v) 386 Provision for plant and equipment depreciation at 1 April
2015 (v) 185
Retained earnings at 1 April 2015 621
Sales revenue 2,220
Share premium at 1 April 2015 310
Trade payables 190
Trade receivables 130
Suspense account (iv) 5
5,458 5,458
Page 5 of 5 OPERATIONAL LEVEL
SUBJECT: F1. FINANCIAL OPERATIONS.
Q. No. 9.(cont’d…….) Additional information:
(i) Deferred development expenditure is being amortised at 10% pa on the straight line basis.
(ii) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31 March 2015.
(iii) The tax due for the year ended 31 March 2015 is estimated at TK83,000 and the deferred tax provision needs to be increased by TK25,000.
(iv) The suspense account is comprised of two items:
• Expenditure of TK20,000 incurred during the year on original research aimed at possibly finding a new material for MNC to use in manufacturing its products.
• TK15,000 cash received from disposal of some plant and equipment that had an original cost of TK82,000 and a carrying value of TK3,000.
The only entries made in MNC’s ledgers for these items were in cash and cash equivalents and suspense account.
(v) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land included in land and buildings is TK800,000. Buildings depreciation should be included in administrative expenses.
Depreciation of plant and equipment is at 12.5% on the reducing balance basis and is treated as part of the cost of sales.
MNC’s policy is to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal.
(vi) On 1 July 2015 one of MNC’s customers started litigation against MNC, claiming damages caused by an allegedly faulty product. MNC has been advised that it will probably lose the case and the claim for TK25,000 will probably succeed.
(vii) On 1 August 2016 MNC was advised that one of its customers, that had been in some financial difficulties at 31 March 2016, had gone into liquidation and that the TK32,000 balance outstanding at 31 March 2016 was very unlikely to be paid.
MNC has not previously made any provisions for legal claims or bad debts.
Required:
(a) Prepare journal entries, with a short narrative, to eliminate the balance on MNC’s suspense account.
(b) Prepare the statement of comprehensive income and a statement of changes in equity for MNC for the year to 31 March 2016 and a statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards.
All workings must be clearly shown.
[Marks: (3+22) = 25]
= THE END =
